Safety Stock and Service Levels in Periodic Review Inventory Systems

Abstract

The management of requirement (purchased parts and components) uncertainty in MRP systems is a serious problem for manufacturing firms. When manufacturing service levels fall below a predetermined service level, safety stock must be increased in order to adjust to the competitive environment. This paper presents the results of a set of simulation experiments in which we investigate some of the complexities of safety stock requirements, lot sizing performance and the marginal safety stock requirements associated with various service level policies. The results of the experiments have empirically shown that the marginal units of safety stock required for various service level policies follow a predictable (measurable) pattern. The research also indicates that the economic advantages of well-known dynamic lot sizing procedures are diminished by the presence of requirements uncertainty. Another important finding is the interaction between service level and ‘lumpy’ requirements. High levels of the coefficient of variation and the economic time between orders resulted in larger orders, reduced safety stock and high service levels. In general, the overall findings from this research will hopefully provide the decision maker with an in-depth understanding of the measurement and impact of various service level policies.